In Searching the Web, Google Finds Riches

By JOHN MARKOFF and G. PASCAL ZACHARY

Published: April 13, 2003

MOUNTAIN VIEW, Calif.—
IN the last few years, Google has risen as a force on the Internet by offering its smarter, faster searches as a free public service. Now the band of technoinsurgents who run the company are striking a blow against the business strategies of giant Web portals like America Online, Yahoo and Microsoft's MSN by rewriting the rules of Internet advertising.

Emerging as a powerful new marketing medium, Google has found a route to profitability that stands apart in a Silicon Valley that is still crippled by the dot-com crash.

Its rivals are responding by trying to out-Google Google for leadership in a technology -- searching for information -- that they once dismissed as an easily bought commodity. But Yahoo, Microsoft and others are discovering that it will not be easy to unseat Google, which has mastered an enormous private computer network that stores a snapshot of much of the Web and allows searchers to find digital needles in haystacks of data.

Google, a private company, does not disclose revenue or profit. But it says it has been profitable for nine consecutive quarters. Moreover, its executives have privately told the board that revenue will soar from less than $300 million in 2002 to $750 million or more this year, with gross profit margins of 30 percent, according to a Google executive and several people who have knowledge of the company's financial situation.

That cash is flowing from the likes of Ge'Lena Vavra, an importer of Italian suits in Las Vegas who is among more than 100,000 advertisers to flock to Google in the last year. Last May, she decided to pay from 21 cents to $1.50 each time her ad for discount Italian suits was clicked after a search for words like ''Armani'' or ''Hugo Boss.''

One form of Google advertising allows companies to buy two lines of text that appear above the results of each search. A newer ad program, the one used by Ms. Vavra, displays boxed text ads on the right side of a search result. Depending on popularity, advertisers pay anywhere from pennies to dollars when a searcher clicks on the ad.

Both advertising programs rely on Google's software to make the ads relevant to Web surfers' search requests. They are limited to text; graphics are not allowed, a limitation that Google says is crucial to its popularity with users, who are irritated by pop-up and video ads.

Before Ms. Vavra advertised with Google, she was selling about 10 suits a month over eBay. Then she bought 50 Google keyword ads using her Visa card. The next morning, she said, sales took off. The business has continued to grow; she now sells almost 120 suits a month. She expects to spend $60,000 this year on Google search ads.

''Our business exploded from Google, and Google alone,'' she said.

Google has created a buzz in Silicon Valley that has not been heard since Netscape Communications, the original leader among Web browsers, took the stock market by storm in 1995 with its initial public offering. Despite hopes among investment bankers, Google says it has no plans to sell stock to the public this year. Still, its emergence as a star (giving rise to the pop culture term ''googling'') validates the notion that, even during a grim technology downturn, Silicon Valley retains some of its unique allure.

In an effort to capitalize on that allure, Yahoo -- which has long relied on Google's search technology -- last Monday introduced a search tool that closely imitates Google's idea. In the future, Yahoo intends to draw heavily on technology obtained in a recent acquisition of a unit of Inktomi, once a leading Google rival.

Yahoo denies that its new initiative is a declaration of war on Google. Eric E. Schmidt, 47, Google's chief executive, also says the two companies are still allies. But relations are strained.

Google's newfound power as arbiter of much of the world's digital information, meanwhile, is posing concerns about privacy and fairness, not only from competitors but also from social policy experts and even librarians. Some worry that the company may have become too central in an age when so much vital information is available online.

Google says that it goes to great lengths to maintain the privacy of its users and that it refuses to allow advertisers to influence the results of its regular searches.

''They're the traffic cop at the main intersection of the information society,'' said Jonathan Zittrain, co-director of the Berkman Center for Internet and Society at Harvard Law School. ''They have an awesome responsibility.''

Google's rise initially flowed from a single software innovation: a formula to retrieve pages ordered by their relevance to a Web surfer's request.

The basic idea, known as ''link analysis,'' was not new. But in 1996, Sergey Brin and Larry Page, then graduate students in computer science at Stanford, began applying it to the global links that connect Web pages. Their idea was to exploit existing human intelligence by tracking the popularity of billions of different Web pages. Two years later, the two men would found Google.